Recent Posts

About

Bruce came to personal finance writing the old fashioned way: he didn't have much money, but wanted to do cool things. Clearly, some creativity was in order. From traveling around Europe to paying for a wedding, moving to New York to raising a child, he's figured out how to have fun without spending much money. In the process, he's also learned a few things about how politics and economics can help (or hurt) middle class finances. As DailyFinance's senior features writer, Bruce gets to combine his two favorite things: learning how the world works and explaining what he's learned to his readers.

Republican presidential candidate Herman Cain unveiled several major changes to his popular 9-9-9 tax plan on Friday. The former Godfather's Pizza CEO even announced that those below the poverty line wouldn't have to pay income taxes. Yet the country's middle class won't find much relief in Cain's fleshed-out 9-9-9 plan. Here's a detailed look:

A Simple Plan

Cain's plan seems to be the height of simplicity: It would levy a 9% income tax, a 9% corporate income tax, and a 9% federal sales tax on all purchases. On the surface, the drop in income tax would help most taxpayers, but the sales tax would be very tough on middle class households. Given that middle class families spend most of their income on necessities, a 9% sales tax pretty much functions as an additional 9% income tax. According to the nonpartisan Tax Policy Center, a household making the median income of $49,445 currently pays an effective federal tax rate (income tax plus payroll tax minus deductions) of 14.3%. Cain's proposal would increase this rate by 3.7%.

It gets worse. According to Edward D. Kleinbard, a tax law professor at USC's Gould School of Law, at least part of the 9% corporate tax would also fall on the heads of workers. Cain's tax plan allows businesses to deduct money based on investments, exports, and purchases made from U.S.-located businesses. What it does not do, however, is allow companies to deduct the wages that they pay their employees. Forced to pay taxes on these wages, Kleinbard argues, corporations would face a major tax increase -- and would pass a large portion of that boost on to their workers.

The Tax Policy Center agrees, noting that a household making the median income of $49,445 would see its total federal tax percentage increase by 9.5 percentage points, to 23.8%.

Class Warfare

On Friday, Cain offered some concessions to the nation's poorest citizens, but did little to alleviate the burden his plan would place on middle tier earners.

Speaking in Detroit, Cain told a crowd of supporters that the nation's poorest citizens wouldn't pay the 9% income tax. While generous, however, this cut wouldn't erase the damage that his 9-9-9 plan would do to the poor. According to estimates, the full 9-9-9 plan would increase taxes on the poor by 15.8 percentage points. Although the removal of the 9% income tax for them would help, they would still pay more taxes than they currently do.

What's worse, the poor would also lose tax-based benefits that they rely on. Some programs -- such as the earned income tax credit and the child tax credit -- aren't merely tax deductions: They are actually refunds. In other words, poor families receive these benefits even if they are larger than the total tax levy that they would pay. As Elaine Maag, a senior research associate at the Urban Institute notes, these programs translate into "money in their pockets." Maag points out, however, that "Under Cain's plan, that portion of the social safety net would disappear."

What Kind of Empowerment?

One of the most mysterious aspects of Cain's plan has been his "Empowerment Zones" or "Opportunity Zones." In these areas -- which he didn't really define until Friday -- his plan allowed companies to take "deductions for the payroll of those employed in the zone." As for the workers themselves, his plan offered "additional deductions for those living and/or working in the zone." On Friday, he gave a hint at what those changes could be, noting that in the designated zones, 9-9-9 could become 3-3-3, with taxes slashed in each category.

The fact that he made his speech in Detroit gave a clear idea of which areas he planned to target for empowerment: depressed urban zones. For households either living in these zones or willing to relocate to them, Cain's plan could be a major boon, offering sweeping tax cuts and a major stimulus to job-creating corporations. However, there was also a sharp bite of medicine to go with the spoonful of sugar: To be designated as an opportunity zone, Cain noted that "cities will have to step up and remove some of the barriers that are within their city limits, so that the cities do what they can do to help themselves."

While Cain didn't give a complete list of all the "barriers" that would need to be changed, he outlined a few requirements. Opportunity zones would have to eliminate the minimum wage, enact school voucher programs, and designate themselves as "right to work" areas. Noting that zoning laws and building codes can add to business costs, he also announced that companies in these areas could apply for waivers that would enable them to bypass these rules.

In other words, Cain's plan wouldn't just cut taxes for companies that move into blighted urban areas. Through the empowerment zone program, it would also remove or scale back many twentieth-century laws that were designed to protect workers.

Just Like Starting Over

While Cain's tax plan has alarmed many economists and analysts, it has also highlighted a key problem with the tax code: It's simply too complex. Including all associated laws, the code totals more than 72,000 pages and contains a near-endless collection of cuts, breaks and deductions. However, Kleinbard notes, Cain's plan throws the baby out with the bathwater: "The solution is to directly address the twists and turns of the tax code. You don't abandon a hundred years of intellectual investment in the tax code in favor of a radically different, highly regressive plan. If we have the political will to enact Cain's plan, then we have a political will that is more than capable of addressing the complexities of the current tax code."

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

Banking Services 101

TurboTax Articles

Ordinarily, when you sell something for more than what you paid to get it, you have a capital gain; when you sell it for less than what you paid, you have a capital loss. Both can affect your taxes. But if you immediately buy a similar property to replace the one you sold, the tax code calls that a "like-kind exchange," and it lets you delay some or all of the tax effects. The Internal Revenue Service (IRS) uses Form 8824 for like-kind exchanges.

Achieving a Better Life Experience (ABLE) accounts allow the families of disabled young people to set aside money for their care in a way that earns special tax benefits. ABLE accounts work much like the so-called 529 accounts that families can use to save money for education; in fact, an ABLE account is really a special kind of 529.

One of the many benefits of working at home is that you can deduct legitimate expenses from your taxes. The downside is that since home office tax deductions are so easily abused, the Internal Revenue Service (IRS) tends to scrutinize them more closely than other parts of your tax return. However, if you are able to substantiate your home office deductions, you shouldn't be afraid to claim them. IRS Form 8829 helps you determine what you can and cannot claim.

Form 8859 is a tax form that will never be used by the majority of taxpayers. However, if you live in the District of Columbia (D.C.), it could be the key to saving thousands of dollars on your taxes. While many first-time home purchasers in D.C. are entitled to a federal tax credit, Form 8859 calculates the amount of carry-forward credit you can use in future years, not the amount of your initial tax credit.

The Internal Revenue Service (IRS) has the power to seize income tax refunds when a taxpayer owes certain debts, such as unpaid taxes or overdue child support. Sometimes, a married couple's joint tax refund will be seized because of a debt for which only one spouse is responsible. When that happens, the other spouse is said to be "injured" and can file Form 8379 to get at least some of the refund.

Add a Comment

346 Comments

Filter by:

Alan

Obama was elected President, with no qualifications but other than a glib mouth, he has nothing to offer. He NEVER ran any business whatsoever, has no clue as to how small business thinks, is run or what their needs are. He divisive, pushing class warfare. Additionally, his rant about "oh let's tax those wealthy more who make over $200,000" is insanity. Today $200,000 is not that much. At least $50,000 goes to varous taxes, a family that pays for health insurance pays over $20,000 a year, they have car payments, house insurance, and car insurance for thousands a year. Add mortgage, food costs, gas, college education for let's say 3 kids in college or graduate school at the same time is over $100,000 a year (and what if you have more kids to feed and get through school)you thus HAVE NOTHING LEFT. So, WHERE IS THE FAIRNESS?????? He is divisive and has to go.WE need a flat tax and either VERY low or no capital gains tax to encourage investment in business so that they can hire people and create a larger tax base.Wake up voters! YOu want a real future, get rid of this guy and vote fore someone who is NOT divisive and knows business.

Heard this A.M., that President Obama, is sending out HIS BOOK as gifts and that we the American People are paying SEVENTY THOUSAND DOLLARS, In Order For HIM, To DO That. Our President is a MULTI-MILLIONAIRE & He Can't Pay For This Want OF His? Thought he said that we all needed to have "SKIN - IN - THE - GAME" !

MIddle Class Americans DON'T NEED OR WANT additional taxes of ANY kind. We are taxed to death as it is. We are the ones keeping those below the poverty line and millionaires who don't pay enough taxes afloat. Why not make those who can afford it pay their fair share? What's wrong with being fair? And for those below the poverty line, the government needs to quit paying them to have children and then paying them food stamps on top of that. They can work (although most of them don't to) and buy drugs, booze and lottery tickets but they don't have enough left over to pay for necessities that the rest of us pay for -- food, rent, health insurance, and on and on it goes. And Cain's plan will surely wipe out Social Security for those of us who have worked all our lives to get it. His plan is another loose cannon. We don't need that kind of plan. We need something to HELP us -- not take away what we already have. Isn't there somebody running for the Presidency who cares about the middle class? The fat cats in Washington have their "forever" health insurance and pension to live on the rest of their lives after they are no longer serving in their government positions. I think we should whack their "perks" down to our level. After all, they are no better than we are and we are the ones who pay their salaries. They should be forced to live the way the rest of us do.

Keep in mind that part of Cain's plan involves ending the payroll tax. Since that tax is the ONLY source of funding for Social Security, the inescapable conclusion is that Herman will end that program as soon as the money now in the Trust runs out.

The best way to NOW characterize Cain's 9-9-9 plan is 9*-9*-9*, with each asterisk used to guide you to all the exemptions and special conditions that will apply. And this was supposed to be "simple". LOFLMAO!!!

I still haven't warmed to the idea of a 9-9-9 tax plan, mostly for the Federal VAT on top of the state sales tax. Can you imagine additing another 9% tax toward purchases of a car, home and other high-ticket items in addition to other products and services you buy everyday? The biggest losers will be OR, AK, DE,MT and NH where there are no sales taxes.

Any changes will require time, lets remember what not to do. A not so famous quote by Pelosi, we need to vote this bill in so we can see what is in it. NADA means NO. A straight flat tax will not work, studies need to be done to make sure this does not damage business. In hard economic times that is the last thing we do not want to do. With this current administration everyone should be learning from this episode. It has been a show alright but not alright. Time to get back to business instead of government pensions and union pensions. Don`t you think !!

This country wants no part of your tax plan if it hurts the middle class. You say you're a problem solver? Well stick to what you're good at and solve my hunger issue. Hook me up with a "large" Sarge and put some extra cheese on it!

When will it all end? SOMEBODY out there must have a plan that will work. SOMEBODY out there must have some common sense. SOMEBODY out there must be a candidate that's not RICH. SOMEBODY out there needs to step forward and take the lead. So far, the Republican stable is full of candidates waiting for the glue factory.Let's go Republicans....come up with SOMEBODY that we can look up to and believe in. So far, the pickings' are very slim. And to all of you candidates that will take the time to read all of these blogs...Wake up and smell the coffee.Ask yourself while looking in the mirror. Are you a true leader? Are you really qualified to run this country? Are you HONEST enough to tell it like it is? Step forward please!!!!!